How many times have you stayed in a hotel? Probably more times than you can remember. If you need to stay in a hotel once or twice a year, imagine all of the other people who do too.
Becoming a hotel investor is a great way to make passive income, but it requires a lot of hard work. If you are thinking about investing in hotels, read about the pros and cons of this type of investment first.
Pros of Investing in Hotels
Investing in hotels comes with a lot of benefits. These are the positive aspects of hotel investing that you can experience:
Potential Returns
The hotel industry is high risk, high reward. Hotel investors who follow the right steps have the potential to benefit from high returns. A well-managed hotel can deliver higher annual returns when compared to other real estate investments.
This high-yield potential is linked to when hotel room demand increases. As demand increases, especially during high points in the season, hotels can increase prices.
To be a successful investor, you need to have experience in the hotel industry or seek help from people who do. A strong hotel management team helps an investor reap higher yields.
Cost Segregation
Hotel investors can benefit from cost segregation, as most hotels and guest accommodation properties are good candidates.
Cost segregation works by dividing aspects of the hotel to benefit from accelerated depreciation. You can divide these aspects of properties:
- The land
- Decor
- Structure
- Plumbing
- Parking areas
- Landscaping
This strategy allows investors to reap tax benefits by reducing their federal and state tax liability.
Franchisee Benefits
If you become a franchisee of a well-known hotel brand, you reap more benefits from hotel operations.
Holiday Inn, Hilton, and Marriott are common brand names consumers trust and consider reliable. Mariott International is the largest hotel chain in the United States with millions of rooms across the world.
Novice investors can benefit from franchisee hotel investments the most because of the built-in brand recognition and institutional knowledge. As a franchisee investor, you can’t deviate from standards set by the brand you bought into.
You can utilize the brand’s expertise, marketing, and customer data to your advantage. Lenders are more likely to fund a hotel investment from a well-known brand.
As you gain experience with your first hotel investment, you can use your knowledge to invest in boutique hotels.
Investment Portfolio Diversification
Although hotels are considered real estate investments, they have a major separation from real estate stocks and other forms of real estate investments.
Hotel investors can use the investment to diversify their portfolio. This is beneficial because if another investment fails, you’ll have protection from additional investments.
Hotel trends and performance markers aren’t connected to trends that tend to impact other real estate markets. Hotel performance is impacted by certain factors, such as:
- Local events
- Weather
- Quality of service
- Transport links
Assuming your hotel is managed effectively, your investment can perform well even if your other real estate investments aren’t.
Cons of Investing in Hotels
As with anything, there are cons to investing in hotels. You can increase your investment portfolio by adding a hotel property, but you can only benefit by knowing the downsides and how to react to them.
High Upfront Cost
Because the hotel industry has steep drop-offs and prolonged booms, it can be considered a high-risk investment. Investors can put in a lot of upfront costs into their hotels to offset these issues.
If you underfund the equity portion of your investment, you could end up dealing with unmanageable mortgage payments if your profits were to dry up.
Financing a hotel investment might be trickier than other types of investments. You’ll likely need proof that you have hotel management experience before you can get approved for a loan.
The hospitality sector is sensitive to economic changes so lenders fluctuate their terms based on them.
Labor Intensive
Hotels require a lot of hands-on work, more than any other type of real estate investment. To operate a hotel, you’ll need a huge team of staff members, including:
- Front-of-house staff
- Cleaning and sanitation staff
- Food preppers
- Marketing and branding team
The efforts of your team must complement each other, which is where your management will come into play. The job involves a lot of moving parts, so you could hire a hotel manager to maintain your investment.
Even if you choose to hire a property management company to help out, it’s recommended to stay close and involved with your hotel.
Bad Reviews
Good reviews can benefit your hotel’s profit margins, but bad reviews may sink you. Yelp is one of the main review sites that have a major impact on the reputation of a hotel.
A few negative reviews can add up and set off a crisis as they drive away potential and returning customers.
Combat this issue by hiring a stellar customer service and hospitality team. Customers will be more inclined to write a good review if their stay is worth the money.
Dependence on Location
A hotel investment is largely dependent on its location. Since you can’t pick up a hotel and move it somewhere else, it’s important to be smart about investing in a certain area.
Increases and decreases in area popularity are out of your control, even if your hotel is in a hotspot for tourists.
Your hotel investing ROI is also impacted if a local competitor moves into the area. Anything that attracts guests away from your hotel should be considered, even if they can’t all be helped.
Become a Hotel Investor Today
Investing in hotels requires a lot of work and a lot of upfront cash. Lenders can be skeptical about offering loans to investors without hotel experience.
After growing your real estate investments outside of the hotel industry, you might diversify your portfolio with a hotel investment.
By understanding the pros and cons of becoming a hotel investor, you can decide if this path is right for you. For more financial advice like this, check out the other posts on our blog.
